Even Against a Souring Backdrop, Wide-Moat Mondelez Continues to Bake Up Sweet Gains

Business Strategy & Outlook

Since taking the helm at Mondelez more than four years ago, CEO Dirk Van de Put has orchestrated a plan to drive balanced sales and profit growth by extending the distribution of its fare, fueling investments behind its local and global brands, empowering its local leaders, and increasing its innovation agility (aims that are hitting the mark). Against this backdrop, Mondelez targets 3%-5% sales growth long term as it works to sell its wares in more channels and reinvests in new products aligned with consumer trends at home and abroad. Further, it has looked to acquire niche brands to build out its category and geographic exposure, which has been prudent. But despite opportunities to bolster sales, one can never expect the pendulum to shift entirely to top-line gains under Van de Put’s watch; rather, based on his tenure at privately held McCain Foods and past rhetoric, one can suspect ensuring such growth was profitable would prove to be the priority.

As such, the suggestion that Mondelez is poised to realize additional efficiency gains favorably. While management has refrained from quantifying its cost-saving aims, an additional $750 million in costs (a low- to mid-single-digit percentage of cost of goods sold and operating expenses, excluding depreciation and amortization) it could remove (on top of the $1.5 billion realized before the pandemic). This can be achieved by extracting further complexity from its operations, including rationalizing its supplier base, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities. One doesn’t expect these savings to merely boost profits, though. In this vein, management has stressed a portion of any savings realized would be spent in support of its brands in the form of research, development, and marketing, buttressing the brand intangible asset underpinning Mondelez’s wide moat. This aligns with the forecast for research, development, and marketing to edge up to nearly 7% of sales on average over the next 10 years (or about $2.4 billion annually), above historical levels of 6% ($1.7 billion).

Financial Strengths

In assessing Mondelez’s balance sheet strength, one doesn’t foresee any material impediments to its financial flexibility. In this vein, Mondelez maintained $3.5 billion of cash on its balance sheet against $19.5 billion of total debt as of the end of fiscal 2021. As per forecast free cash flow will average around 15% of sales annually over 10-year explicit forecast (about $5.4 billion on average each year). And returning excess cash to shareholders will remain a priority. Mondelez will increase its shareholder dividend (which currently yields around 2%) in the high-single-digit range on average annually through fiscal 2031 (implying a payout ratio between just north of 40%), while also repurchasing around 2%-3% of shares outstanding annually. Beyond prudently bolstering shareholder returns, Mondelez will continue scouring the landscape to expand its reach by adding brands and businesses in untapped categories and/or geographies from time to time–although one doesn’t believe it has much of an appetite for a transformational deal. The opportunity to expand its footprint into untapped markets–such as Indonesia and Germany–or into other adjacent snacking categories (like health and wellness) could be in the cards. Recent deals have included adding Tate’s Bake Shop for $500 million in 2018, Perfect Snacks (in 2019, refrigerated snack bars), Give & Go (2020, an in-store bakery operator), Chipita (2021, Central and Eastern European croissants and baked goods), Ricolino (2022, a leader in the Mexican confectionery space), and Clif Bar (2022, U.S. manufacturer of energy bars) to its fold. But at just a low-single-digit percentage of sales, none of these deals are material enough to move the needle on its overall results.

Bulls Say

Mondelez’s decision to empower in-market leaders and fuel investments behind its local jewels (which historically had been starved in favor of its global brands) stands to incite growth in emerging markets for some time.
The posit the firm is committed to maintaining a stringent focus on extracting inefficiencies from its business, including the target to shed more than 25% of its non core stock-keeping units to reduce complexity.
Management has suggested it won’t sacrifice profit improvement merely to inflate its near-term sales profile.

Company Description

Mondelez has operated as an independent organization since its split from the former Kraft Foods North American grocery business in October 2012. The firm is a leading player in the global snack arena with a presence in the biscuit (47% of sales), chocolate (32%), gum/candy (10%), beverage (4%), and cheese and grocery (7%) aisles. Mondelez’s portfolio includes well-known brands like Oreo, Chips Ahoy, Halls, Trident, and Cadbury, among others. The firm derives around one third of revenue from developing markets, nearly 40% from Europe, and the remainder from North America.

(Source: Morningstar)

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